Editorial

Private entrepreneurship

It is clear to one and all that economic growth reduces poverty more than anything else. And obviously the private sector is the key contributor to sustained economic growth. Why then, considering the urgent need to lift majority of our people out of poverty, has private entrepreneurship not been unleashed to its full potential in our state? The answer, of course, is not that there are no entrepreneurs. In fact, the release of entrepreneurial activity previously repressed or dormant is an important part of the recent success stories of growth and poverty alleviation. Furthermore, even in societies where growth has stagnated and poverty has risen, thousands of men and women keep their families from starving to death only through the entrepreneurial activities they undertake – albeit very precariously – every day. Go to any village and one will find small entrepreneurs working hard to provide for their families’ subsistence. As useful as this version of the private sector – usually known as the informal economy – is in providing some employment and income to large masses of people, it isn’t enough to defeat their poverty. This is so because informal businesses are constrained to operate in very small markets, usually the local community and consequently they are unable to reap the rewards of productivity and competitiveness that stem from economic specialization in the wider marketplace. Typically, the poorer a society is, the bigger the proportion of its overall economy will be held by its informal economy. Unfortunately, it is obvious that the private sector fails to rise to its potential in creating wealth because property rights aren’t well protected and government regulation of businesses is excessive. As a rule, to legally incorporate a business, a person must complete a labyrinthine series of steps, which consumes a great deal of time and money. The red tape is usually even worse if the aim is to receive legal title to a piece of land. Indeed inability to register a business or property is what most commonly keeps people in the informal sector of the economy. In fact lack of legal status and title to property keep entrepreneurs marginalized from, among other things, credit institutions and protection by the justice system. Contrary to popular belief, poor people do accumulate assets. But because the rights to these assets are not legally defined, they cannot be used as collateral for bank loans or as any form of capital useful in establishing and expanding a formal business. Yes, one of the biggest political challenges facing developing countries is to bring the assets of the extralegal sector into a more inclusive legal property system in which they can become more productive and generate capital for their owners. Also even when the difficulty of registering businesses and land is overcome, entrepreneurs face other hurdles that make their productive activity riskier and less likely to succeed. And, not surprisingly, the more hurdles there are, the more corruption there is. This naturally compels entrepreneurs to do business in very small environments where people know and trust one another, thereby losing the economies of scale offered by bigger markets. Add to these things unreliable or nonexistent credit bureaus and it is easy to see why obtaining credit from banks is nearly impossible for a small entrepreneur – even if one already possess legal identity and property. Needless to say, effectively addressing these issues are not all that a state must do to overcome underdevelopment. Other key elements, such as good governance, macroeconomic discipline, open markets and sufficient investment in infrastructure and education, must also be put into play. However, the point is that if entrepreneurship is not allowed to blossom, progress is well-nigh impossible, even if the other ingredients are in place. The message is precise and compelling – poverty will remain intractable so long as there is a lack of a vigorous private sector. In fact it is imperative that all impediments to a vigorous private sector must be removed for growth and development of the society.

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